Overbuilt Subject

[Em Tee]

Background: the subject is located in an area of homes where the average size is 1800-2700 sq ft. The subject was enlarged and is 3700 sq ft. It still conforms in style to the rest of the neighborhood and you can't tell by looking at it that it's that large (it was nicely done). Anyway, I used 2 comps close by that were 2700 sq ft and 2100 sq ft. Then I used 3 comps from 1 mile to 2.5 miles away that were 3200-3600 sq ft. I used a very minimal sq ft adjustment for the subject's additional sq ft. I gave the most weight to my nearest comp at 2700 sq ft. My final value is $10,000 over the highest unadjusted sales price of my comps.

Now I get back the following condition:

When the subject property is over-built for the area, this client expects a common sense approach to value. What this means is they expect you to provide all comps from the subject's immediate market area (even if all the comps are smaller) and give full value up to the largest typical home for the market. Then adjust for the sq.ft. above the largest typical home at a fraction of full value per sq.ft. used in your report.

The next largest sale in the subject's actual tract of homes is 1800 sq ft. I wouldn't consider this as a "comp" for the subject, but yet it sounds like they want me to use this. Should I add one more comp and just give it no weight?

Ideas?

 

[PropertyEconomics]

Background: the subject is located in an area of homes where the average size is 1800-2700 sq ft. The subject was enlarged and is 3700 sq ft. It still conforms in style to the rest of the neighborhood and you can't tell by looking at it that it's that large (it was nicely done). Anyway, I used 2 comps close by that were 2700 sq ft and 2100 sq ft. Then I used 3 comps from 1 mile to 2.5 miles away that were 3200-3600 sq ft. I used a very minimal sq ft adjustment for the subject's additional sq ft. I gave the most weight to my nearest comp at 2700 sq ft. My final value is $10,000 over the highest unadjusted sales price of my comps.

Now I get back the following condition:


The next largest sale in the subject's actual tract of homes is 1800 sq ft. I wouldn't consider this as a "comp" for the subject, but yet it sounds like they want me to use this. Should I add one more comp and just give it no weight?

Ideas?

I wonder where their market data came from for the "fractional" adjustment?
I would ask you, are there other homes in the neighborhood that are similar in size? I know you have stated there are no sales but are similar homes in existence?

 

[Randolph Kinney]

The problem is with the word, "comp". When you have a property that is significantly larger than anything in its immediate neighborhood, there are no real comps. It is an over improvement. Even going to a competing neighborhood does not show your property to be anything less than an over improvement.

The suggestion is that you find the highest sold price in the subject's neighborhood and use that as your basis to determine a value, making minimal adjustments for GLA difference.

 

[Mike Boyd]

I have always made it a point that at least one comp has to have sold at or above the final value given to the subject. Otherwise, it seems to me, you have not proven that there is a market for that larger home. Actually, it doesn't look like it is significantly over-built. When you have homes that are 2,700 sf and the subject is 3,700 sf it is more or less consistent. If you have to go out of the subject's immediate neighborhood for comps, you must ask yourself (or Realtor friends) if a prospective buyer would consider homes in each neighborhood. If YES, then it is in the same competing market area. Explain why, make any location adjustments you can support. In many upscale subdivisions, it is not unusual to have models that are significantly larger than the next largest. Builders make larger profits on larger homes. They may have loss leaders to attract prospective buyers and make up for it with some larger, more expensive homes.

 

[Em Tee]

I wonder where their market data came from for the "fractional" adjustment?
I would ask you, are there other homes in the neighborhood that are similar in size? I know you have stated there are no sales but are similar homes in existence?

I looked back 5 yrs and there were 2 homes at 3000 sq ft and one at 3400 sq ft. Nothing larger.

Randolph: You said "find the highest sold price in the subject's neighborhood and use that as your basis to determine a value, making minimal adjustments for GLA difference". That's what I did with my 2 closest comps and that's why I don't understand the condition sent back to me. Am I not understanding it correctly? Should I do something different?

 

[PropertyEconomics]

I looked back 5 yrs and there were 2 homes at 3000 sq ft and one at 3400 sq ft. Nothing larger.

Randolph: You said "find the highest sold price in the subject's neighborhood and use that as your basis to determine a value, making minimal adjustments for GLA difference". That's what I did with my 2 closest comps and that's why I don't understand the condition sent back to me. Am I not understanding it correctly? Should I do something different?

EmTee ... my personal opinion then is that the subject is not necessarily overbuilt for the neighborhood but merely that those properties of comparable size were not sold as of the effective date of valuation.
I would go back and look at those sales of 3000 and 3,400 square feet and compare them with properties similar in size as you used in your report as of their respective dates of sale. You can gleen appropriate square footage adjustments comparing historical larger sales with historical smaller sales. This would be the appropriate analyais in my opinion.

I further think supporting your final value estimate with sales from a competitive market area which were similar in size to your subject is in fact appropriate.

For those smaller sales you used within your neighborhood, I believe if you do the matched pair analysis, even if from five years ago, you will come away with a much more supported conclusion. I would do this on a percentage basis (ie if 5 years ago your typical square footage adjsutment were say $30 a square foot and the analysis of these sales shows $25 a square foot the difference would be approximately 83% - $25 / $30 = 83% +/-) I would then take that percentage and apply it to your market derived square foot adjustments current and you would have market support for the differences in size as measured from your immediate market. Its not perfect, but it sure is market support.

 

[Mike Kennedy]

"I looked back 5 yrs and there were 2 homes at 3000 sq ft and one at 3400 sq ft. Nothing larger."

Comparables 1 and 2, adjusted for market condition changes from 2004 (if warranted), provide adequate support for market conditions adjustments to the comparables (if warranted) and the Appraiser's opinion that the Subject's additional 300sf GLA represents Functional Obsolescence-Superadequacy, Incurable, in the Subject's neighborhood. Comparables 3 & 4 adequately illustrate the most current proximate values in the Subject's immediate, local, market. Comparables 5 & 6, requiring downward location adjustment, demonstrate the most competitive, current, values in an adjacent competing neighborhood. Comparable 7 is an Actively Listed, Competitive property in the Subject's immediate neighborhood which further demonstrates market reaction to excess GLA over 3400sf. After market-indicated adjustment for comparative variances, in the Appraiser's opinion, the best available, most similar, proximate, and competitive value indicators reliably provide the basis for the Appraiser's Final Value Opinion for the Subject. Most weight is placed on the most proximate Comparables in the subject's immediate neighborhood.

 

[PropertyEconomics]

"I looked back 5 yrs and there were 2 homes at 3000 sq ft and one at 3400 sq ft. Nothing larger."

Comparables 1 and 2, adjusted for market condition changes from 2004, provide adequate support for market conditions adjustments, and the Appraiser's opinion that the Subject's additional 300sf GLA represents Functional Obsolescence-Superadequacy, Incurable in the subject's local, current, market. Comparables 4&5 adequately illustrate the most current proximate values in the Subject's immediate, local, market. Comparables 6, 7, & 8 demonstrate the most competitive, current, values in an adjacent competing neighborhood. After market-indicated adjustment for comparative variances, in the Appraiser's opinion, the best available, most similar, proximate, and competitive value indicators reliably provide the basis for the Appraiser's Final Value Opinion for the Subject. Most weight is placed on the most proximate Comparables in the subject's immediate neighborhood.

DANGER WILL ROBINSON .. there is no market support for this statement. Does 300 square feet really represent superadequacy ... does every largest home in every neighborhood suffer from superadequacy and functional obsolescence .... often overused and misunderstood terms.

Do the paired analysis along with the market conditions adjustment as suggested by Mr Kennedy and see where you come out .... Id not make statements of fact that are not fact nor which can be supported.

NOW MIKE ... one listing does not a market reaction make (where the heck was a listing discussed) darn man you have information that I either dont see or my crystal ball wont work on ....

 

[Mike Kennedy]

Does the existence of 1 or 2 or 20 4000sf-5000sf homes which haven't sold in 10 years reliably substantiate a current market conclusion that the 300sf extra GLA does not represent an over-improvement in the subject's neighborhood?

 

[PropertyEconomics]

Does the existence of 1 or 2 or 20 4000sf-5000sf homes which haven't sold in 10 years reliably substantiate a current market conclusion that the 300sf extra GLA does not represent an over-improvement in the subject's neighborhood?

NO .. and I didnt say it did. What it most probably shows is that the market for these homes is extremely stable.

I just am not a fan, as Im sure you arent, of making comments that the market doesnt support and without sales there is no way to support the conclusions.

How long were the 3,000 and 3,400 sq ft homes on the market over the past five years? We simply dont have the data before us to make comments really.